What Worked With Japan Won’t Work With China

In the 1980s, the United States threatened sanctions if Japan did not reduce its trade deficit. One consequence — intended or unintended — was that Japanese investments in the United States increased dramatically in response to the punitive sanctions.

These are called “tariff-jumping” investments and today there are commentators who call for similar policies to get the Chinese to switch from exporting to the United States to investing in the United States. Apple features prominently in this debate because the company has outsourced almost all the manufacturing of its popular products to China.

China is the center of an East Asian production and supply network. That, as much as cheap labor, gives it a daunting advantage.

It is hard to see how a similar policy would lead to gains in high-tech manufacturing jobs in the United States. One big difference between Apple today and Toyota in the 1980s is that Apple’s entire manufacturing eco-system — suppliers, the suppliers to suppliers, and the third- and fourth-tier suppliers — are all located in Asia, mostly in China. Apple went to China not just because the labor costs are cheap but also because the supply base is there. Proximity to suppliers is probably more valuable to a company than proximity to its market. Toyota invested in the United States because there was still a supply base to cultivate and eventually to tap into. Apple would have to start from scratch.

Many say that reducing the large trade deficits with China would bring back jobs that had been offshored. But this is fanciful. We count trade figures by country when the economics is more regional. China is the final assembly place for Apple products and all exports of Apple products are then assigned to China’s trade balance. The proper way to view trade is to look at the sum of the deficits of East Asia as a whole. A policy to penalize China would simply redistribute the trade deficit, and jobs, elsewhere in East Asia.

Those jobs will not come back to the United States even if the trade deficit with China were to decline. In fact, in the past four years, China’s trade surpluses have come down substantially, yet unemployment in the United States remains stubbornly high.

Why risk a political rupture with China with a policy that will produce dubious benefits for the United States?